After years of low interest rates, it seems 2022 is the year we’ll see them on the rise. With the Federal Reserve planning to embark on a series of interest-rate hikes this year beginning in March, real estate investors are preparing for these predictions to potentially become reality.
Fortunately, smart investors work from a strategic point of view, and many apply the BRRRR model, which helps in situations like these. To refresh, the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment strategy that involves buying and rehabbing a property, renting it out, and refinancing the leased up rental property over a 30-year term at a fixed rate of interest. This Method provides an opportunity for passive income and a diverse rental portfolio. If BRRRR Method is one of your investment strategies, now is the time to lock in for the long-term.
The process of the BRRRR Method is:
Buy a distressed property.
When buying a distressed property, it's important to calculate the after-repair value (ARV). The ARV estimates the home's value after rehab or renovating the property. To determine ARV, compare the planned final quality of the house to similar homes or "comps" that have recently sold in the area. A "comp" home is defined as similar in size, number of bedrooms/bathrooms, age, square footage, etc.
Rehab by bringing the home up to code, then focusing on increasing value.
Before you begin, build a realistic budget and timeline for your project. Prioritize bringing the house up to code and making it safe and inhabitable. Your budget will determine the number of updates you can make and where to allocate your funds. Choose updates that increase the home’s value the most, such as updated bathrooms or updated kitchens.
Rent to quality tenants.
When it comes to choosing tenants, look for certain qualities:
- A good record of on-time payments
- A stable job with a steady income
- A good credit report
- No criminal behavior or history of eviction
- Positive references
Refinance the fully leased rental property with a 30-year fixed rate using either:
a.) a rate & term loan product that will allow you to achieve the most efficient, low rate on your loan OR
b.) a cash-out refinance loan that will allow you to pull some money of the property for use on another property purchase.
Repeat by doing the process in the same order.
Now is the time to be proactive and vigilant with your investments. With interest rates already rising, lock in your rate today.
